Regional integration arrangements in Africa: Is a large membership the way forward?

Regional integration and cooperation is the way ahead in Africa, but the latest initiatives such as the TFTA and CFTA will face substantial challenges. Integrating in small groups, while abandoning the linear model of integration, should be the most fruitful approach.

Last year saw the launch of the Tripartite Free Trade Area (TFTA) between 26 countries accounting for over half of Africa’s GDP and with 632 million consumers, 56 percent of its continental population. A continental FTA (CFTA) is also to be launched in, or around, 2017. The first CFTA negotiating forum is set to take place later on this month. Phase I of the TFTA suggests modest efforts at integration as it is built on the principles of variable geometry eschewing a more ambitious "single undertaking" and the acquis (go forward but not backwards) with modest tariff reductions on the table, a list (rather than an economy-wide criterion) for rules of origin, and trade remedies to address dumping and import surges. The agenda for phase II is to be decided but should include services and harmonisation of rules on competition policy.

The TFTA is expected to be ratified by at least half of the members within a year, at which point it will come to life. [1] Is the attempt at rationalising the multiple Regional Integration Agreements (RIAs) across the continent a milestone towards greater cooperation in Africa? Drawing on observations and analysis of the recent experience, I argue that, in spite of the unfavorable geography making it difficult to deal with the high costs of heterogeneity, integration initiatives in small member groups will produce the highest benefits.

Beyond the linear integration model: a third phase of African integration?

Following the founding of the Organization of African Unity in 1963, a first wave of RIAs took place along "Regional Economic Communities" (RECs) behind high tariff walls. These RECs were to be the ‘building blocks’ of the hoped-for African Union in the immediate post-colonial era. Now, they are central for implementing the New Partnership for Africa’s Development (NEPAD). In short, the RECs were and continue to be the glue that will cement African unity. The first wave failed not only for economic reasons, but also because the leaders of these young post-independence African states were reluctant to encourage the emergence of a supra-national authority necessary to deepen cooperation and to coordinate and manage the affairs of the hoped-for African Union. Great diversity within the RIAs translated into different interests that strengthened countries’ insistence on the "respect for the sovereignty and territorial integrity of each State and the inalienable right to independent existence" as written in the OAU charter of 1963. Commitment to pan-Africanism was weakened, leading to vagueness and a multitude of declared objectives in these RIAs that helped states gloss over the issues that divided them [2].

A second wave of RIAs took place after the Abuja Treaty of 1991 that created the African Economic Community (AEC). A look at the ten major RIAs started in the second wave of RIAs shows that only three have aimed for FTA status, all others aiming for deeper integration, moving along the linear model following a stepwise integration of goods, labor, and capital markets, and eventually monetary and fiscal integration. Goods market integration would start with an FTA, then move on to a Customs Union (CU) with a Common External Tariff (CET) and to a Common Market. Along this linear sequence, except for SACU, none have really reached full CU status as exceptions to the 4-5 CET tariff-band structure are long. For example, the ECOWAS CET includes an “exceptions list” of about 300 products eligible for exemption from the new tariffs, a list that includes 200 products from the former Nigerian Import Ban list [3].

The disappointing trade performance of this model of integration has been widely discussed. Among others, estimates of the volume of intra-regional trade in African RIAs suggest that trade is on average 40 percent less than potential trade. Further results also seems to indicate that trade costs among partners have fallen less rapidly than trade costs with outside partners [4]. This persisting thickness of borders not only reflects the geography of African trade, the low trade complementarity across partners, poor logistics, and border delays, but also the neglect of services in the African linear integration model which is no longer adapted to 21st century trade.

So far negotiations for the TFTA and CFTA are following this model of linear integration that neglects the fact that 21st century production is increasingly taking the form of trade in tasks (i.e. services) as opposed to trade in products. In this new environment, services play an input function through space (transport, telecommunications) and time (financial services) as well as direct inputs into economic activity as they generate knowledge and human capital. Recent developments in the study of global value chains by the OECD show that services may account for more than 50 percent of exports when measured in value added. Because services do not meet customs for registration, and regulations are, at best, imperfectly captured, services—except for labor and foreign direct investment (FDI) flows—are not directly observed crossing borders. Measures of the restrictiveness of trade in services are only very approximate, though estimates of trade costs for mode I (cross-border services trade) and mode II (movement of consumers) could be two to three times higher than trade costs for trade in goods when measured by the same approach (the ‘gravity trade model’).

Breaking away from the linear model of integration by emphasising trade facilitation measures at the border that have full support of the business community is a first step now under way. However, even in the case of the EAC Common Market, there has been little progress at removing restrictions for professional services, telecommunications, and transport either unilaterally or on a regional basis. Likewise, progress with liberalisation of services through harmonisation and mutual recognition has been slow where opting for ‘mutual equivalence’, the route that was followed by the EU Services Directive might have worked better as this approach is less demanding on trust than mutual recognition or harmonisation.

Challenges ahead: breaking small markets while dealing with heterogeneity

In 2013, all of Africa’s gross domestic product (GDP) at purchasing power parity (PPP) was less than Germany’s and the median GDP size of African countries was US$12.3 billion, about 10 percent of the size of the canton of Zurich. Reaping the benefits of economies of scale and of diluted monopoly power suggests RIAs with large memberships like the TFTA and the CFTA. But a large membership also implies more heterogeneity and greater sources of potential conflicts (more ethnic groups; large and small countries; and landlocked and coastal states belonging in the same regional group) with higher political costs in the provision of public goods. In large membership groups, integration is shallow because it is difficult to reach agreement and it is likely that the interests of the more powerful members that are naturally less open to the outside world will carry the day. Take ECOWAS where Liberia and Nigeria are both members. Adopting the CET took close to ten years of negotiations as Nigeria insisted on a 5-band CET (0-35 percent) while UEMOA and others were in favor of a 4-band CET (0-20 percent). For Liberia, the move to the CET could double the average tariff and raise the current costs of living of rural and urban households by 6 percent and 3 percent respectively with temporary special protection measures only envisaged for products currently above their respective band, but no consideration has been given for tariffs below their respective band [5]. The costs of integration to a customs union for small countries in a large membership group with large partners are likely to be high.

This experience poses a challenge for the 26 member TFTA because 21st century regionalism is no longer about an exchange of market access at the expense of non-members but about implementing reforms that will attract foreign direct investment (FDI) which brings to the region the service activities necessary to participate in the outsourcing of production. In this new environment, where trade is trade in tasks and involves increasingly an exchange of intermediate goods, protection (or exchange of market access) amounts to depriving oneself from participating in global outsourcing. Not only is the deep integration necessary to attract FDI likely to be hard to carry out in a large membership, but there is also the risk that protection towards non-members could remain high.

Deep integration requires some delegation of authority to a supra-national level. This is easier to carry out under small membership. The 5-member EAC which started implementing in 2010 a Common Market in capital, goods, and services, uses a scorecard approach to measure progress (violations of the protocol's provisions in services are made public on the EAC website, which is far more informative on progress at integration than websites for other African RTAs). The EAC is also promoting competition in telecommunication by banning roaming charges within the region and issues single tourist visas for Northern corridor countries (Rwanda, Kenya and Uganda). The EAC is the only RIA where the ratio of actual to potential intra-regional trade rose following integration.

Breaking the curse of small markets favors the large group approach to exploit economies of scale but cooperation associated with public goods like a common currency, a common judicial and legal framework, appropriate regulatory policies also bring benefits. For the Franc zone members, sharing a common currency is associated with more intense bilateral trade attributable to less volatility in bilateral exchange rates. Thus SACU, the UEMOA, and CEMAC have benefitted from deep integration albeit with the costs of institutional development covered by the colonisers and the EAC is moving in that direction. On the other hand, larger memberships like the TFTA with more heterogeneous populations ace higher political costs in the provision of public goods. The European experience shows that the trade-off between economies of scale and heterogeneity of preferences can only be partially addressed through decentralisation at different layers of administration [5].

In Africa, regional spillovers are important as transport and communications infrastructure are under-provided, but the ethno-linguistic diversity across "artificial" borders indicates strong differences in policy preferences that will continue to hinder the future supply of public goods through the adoption of common regional policies in large groupings. Common decision-making internalises the spillovers but it moves the common policy away from its preferred national policy (i.e. a loss of national sovereignty). By analogy with the experience of the EU, are initiatives like the TFTA and the CFTA a start of institutional and political cooperation along intergovernmental lines where regional institutions pursue the economic interests of domestic constituencies? Or, more optimistically, as hoped for by the African Union (AU), is this a start along functionalist lines where supranational institutions and agents develop an autonomous role leading to further integration?

Author: Jaime de Melo, Emeritus professor at the University of Geneva and scientific director at the Fondation pour les études et recherches sur le développement international (Ferdi).